G.R. No.

L-28896 February 17, 1988

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
ALGUE, INC., and THE COURT OF TAX APPEALS, respondents.

CRUZ, J.:

Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance On the other hand, such collection should be made in
accordance with law as any arbitrariness will negate the very reason for government itself. It is therefore necessary to reconcile the apparently conflicting interests
of the authorities and the taxpayers so that the real purpose of taxation, which is the promotion of the common good, may be achieved.

The main issue in this case is whether or not the Collector of Internal Revenue correctly disallowed the P75,000.00
deduction claimed by private respondent Algue as legitimate business expenses in its income tax returns. The
corollary issue is whether or not the appeal of the private respondent from the decision of the Collector of Internal
Revenue was made on time and in accordance with law.

We deal first with the procedural question.

The record shows that on January 14, 1965, the private respondent, a domestic corporation engaged in
engineering, construction and other allied activities, received a letter from the petitioner assessing it in the total
amount of P83,183.85 as delinquency income taxes for the years 1958 and 1959.1 On January 18, 1965, Algue flied
a letter of protest or request for reconsideration, which letter was stamp received on the same day in the office of the
petitioner. 2 On March 12, 1965, a warrant of distraint and levy was presented to the private respondent, through its
counsel, Atty. Alberto Guevara, Jr., who refused to receive it on the ground of the pending protest. 3 A search of the
protest in the dockets of the case proved fruitless. Atty. Guevara produced his file copy and gave a photostat to BIR
agent Ramon Reyes, who deferred service of the warrant. 4 On April 7, 1965, Atty. Guevara was finally informed that
the BIR was not taking any action on the protest and it was only then that he accepted the warrant of distraint and
levy earlier sought to be served.5 Sixteen days later, on April 23, 1965, Algue filed a petition for review of the
decision of the Commissioner of Internal Revenue with the Court of Tax Appeals.6

The above chronology shows that the petition was filed seasonably. According to Rep. Act No. 1125, the appeal
may be made within thirty days after receipt of the decision or ruling challenged.7 It is true that as a rule the warrant
of distraint and levy is "proof of the finality of the assessment" 8 and renders hopeless a request for
reconsideration," 9 being "tantamount to an outright denial thereof and makes the said request deemed
rejected."10 But there is a special circumstance in the case at bar that prevents application of this accepted doctrine.

The proven fact is that four days after the private respondent received the petitioner's notice of assessment, it filed
its letter of protest. This was apparently not taken into account before the warrant of distraint and levy was issued;
indeed, such protest could not be located in the office of the petitioner. It was only after Atty. Guevara gave the BIR
a copy of the protest that it was, if at all, considered by the tax authorities. During the intervening period, the warrant
was premature and could therefore not be served.

As the Court of Tax Appeals correctly noted," 11 the protest filed by private respondent was not pro forma and was
based on strong legal considerations. It thus had the effect of suspending on January 18, 1965, when it was filed,
the reglementary period which started on the date the assessment was received, viz., January 14, 1965. The period
started running again only on April 7, 1965, when the private respondent was definitely informed of the implied
rejection of the said protest and the warrant was finally served on it. Hence, when the appeal was filed on April 23,
1965, only 20 days of the reglementary period had been consumed.

Now for the substantive question.

The petitioner contends that the claimed deduction of P75,000.00 was properly disallowed because it was not an
ordinary reasonable or necessary business expense. The Court of Tax Appeals had seen it differently. Agreeing
with Algue, it held that the said amount had been legitimately paid by the private respondent for actual services
rendered. The payment was in the form of promotional fees. These were collected by the Payees for their work in
the creation of the Vegetable Oil Investment Corporation of the Philippines and its subsequent purchase of the
properties of the Philippine Sugar Estate Development Company.
Parenthetically, it may be observed that the petitioner had Originally claimed these promotional fees to be personal
holding company income 12 but later conformed to the decision of the respondent court rejecting this assertion.13 In
fact, as the said court found, the amount was earned through the joint efforts of the persons among whom it was
distributed It has been established that the Philippine Sugar Estate Development Company had earlier appointed
Algue as its agent, authorizing it to sell its land, factories and oil manufacturing process. Pursuant to such authority,
Alberto Guevara, Jr., Eduardo Guevara, Isabel Guevara, Edith, O'Farell, and Pablo Sanchez, worked for the
formation of the Vegetable Oil Investment Corporation, inducing other persons to invest in it.14 Ultimately, after its
incorporation largely through the promotion of the said persons, this new corporation purchased the PSEDC
properties.15 For this sale, Algue received as agent a commission of P126,000.00, and it was from this commission
that the P75,000.00 promotional fees were paid to the aforenamed individuals.16

There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and
paid the corresponding taxes thereon.17 The Court of Tax Appeals also found, after examining the evidence, that no
distribution of dividends was involved.18

The petitioner claims that these payments are fictitious because most of the payees are members of the same
family in control of Algue. It is argued that no indication was made as to how such payments were made, whether by
check or in cash, and there is not enough substantiation of such payments. In short, the petitioner suggests a tax
dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction.

We find that these suspicions were adequately met by the private respondent when its President, Alberto Guevara,
and the accountant, Cecilia V. de Jesus, testified that the payments were not made in one lump sum but periodically
and in different amounts as each payee's need arose. 19 It should be remembered that this was a family corporation
where strict business procedures were not applied and immediate issuance of receipts was not required. Even so, at
the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received
by him or her, to make up the total of P75,000.00. 20 Admittedly, everything seemed to be informal. This arrangement
was understandable, however, in view of the close relationship among the persons in the family corporation.

We agree with the respondent court that the amount of the promotional fees was not excessive. The total
commission paid by the Philippine Sugar Estate Development Co. to the private respondent was
P125,000.00. 21After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the
transaction. The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion,
considering that it was the payees who did practically everything, from the formation of the Vegetable Oil Investment
Corporation to the actual purchase by it of the Sugar Estate properties. This finding of the respondent court is in
accord with the following provision of the Tax Code:

SEC. 30. Deductions from gross income.--In computing net income there shall be allowed as
deductions —

(a) Expenses:

(1) In general.--All the ordinary and necessary expenses paid or incurred during the taxable year in
carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered; ... 22

and Revenue Regulations No. 2, Section 70 (1), reading as follows:

SEC. 70. Compensation for personal services.--Among the ordinary and necessary expenses paid
or incurred in carrying on any trade or business may be included a reasonable allowance for salaries
or other compensation for personal services actually rendered. The test of deductibility in the case of
compensation payments is whether they are reasonable and are, in fact, payments purely for
service. This test and deductibility in the case of compensation payments is whether they are
reasonable and are, in fact, payments purely for service. This test and its practical application may
be further stated and illustrated as follows:

Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not
deductible. (a) An ostensible salary paid by a corporation may be a distribution of a dividend on
stock. This is likely to occur in the case of a corporation having few stockholders, Practically all of
 whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar
services, and the excessive payment correspond or bear a close relationship to the stockholdings of
the officers of employees, it would seem likely that the salaries are not paid wholly for services
rendered, but the excessive payments are a distribution of earnings upon the stock. . . .
(Promulgated Feb. 11, 1931, 30 O.G. No. 18, 325.)

It is worth noting at this point that most of the payees were not in the regular employ of Algue nor were they its
controlling stockholders. 23

The Solicitor General is correct when he says that the burden is on the taxpayer to prove the validity of the claimed
deduction. In the present case, however, we find that the onus has been discharged satisfactorily. The private
respondent has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted
by the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and
involve themselves in a new business requiring millions of pesos. This was no mean feat and should be, as it was,
sufficiently recompensed.

It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for
lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one's
hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of
the government. The government for its part, is expected to respond in the form of tangible and intangible benefits
intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship
is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those
in the seat of power.

But even as we concede the inevitability and indispensability of taxation, it is a requirement in all democratic
regimes that it be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the
taxpayer has a right to complain and the courts will then come to his succor. For all the awesome power of the tax
collector, he may still be stopped in his tracks if the taxpayer can demonstrate, as it has here, that the law has not
been observed.

We hold that the appeal of the private respondent from the decision of the petitioner was filed on time with the
respondent court in accordance with Rep. Act No. 1125. And we also find that the claimed deduction by the private
respondent was permitted under the Internal Revenue Code and should therefore not have been disallowed by the
petitioner.

ACCORDINGLY, the appealed decision of the Court of Tax Appeals is AFFIRMED in toto, without costs.

SO ORDERED.

Commissioner of Internal Revenue vs. Algue Inc.

GR No. L-28896 | Feb. 17, 1988

Facts:
 Algue Inc. is a domestic corp engaged in engineering, construction and other allied activities
 On Jan. 14, 1965, the corp received a letter from the CIR regarding its delinquency income taxes from 1958-1959, amtg to
P83,183.85
 A letter of protest or reconsideration was filed by Algue Inc on Jan 18
 On March 12, a warrant of distraint and levy was presented to Algue Inc. thru its counsel, Atty. Guevara, who refused to receive it
on the ground of the pending protest
 Since the protest was not found on the records, a file copy from the corp was produced and given to BIR Agent Reyes, who deferred
service of the warrant
 On April 7, Atty. Guevara was informed that the BIR was not taking any action on the protest and it was only then that he accepted
the warrant of distraint and levy earlier sought to be served
 On April 23, Algue filed a petition for review of the decision of the CIR with the Court of Tax Appeals
 CIR contentions:
- the claimed deduction of P75,000.00 was properly disallowed because it was not an ordinary reasonable or necessary business
expense
- payments are fictitious because most of the payees are members of the same family in control of Algue and that there is not
enough substantiation of such payments
 CTA: 75K had been legitimately paid by Algue Inc. for actual services rendered in the form of promotional fees. These were
collected by the Payees for their work in the creation of the Vegetable Oil Investment Corporation of the Philippines and its
subsequent purchase of the properties of the Philippine Sugar Estate Development Company.

Issue: W/N the Collector of Internal Revenue correctly disallowed the P75,000.00 deduction claimed by Algue as legitimate business
expenses in its income tax returns

Ruling:
 Taxes are the lifeblood of the government and so should be collected without unnecessary hindrance, made in accordance with law.
 RA 1125: the appeal may be made within thirty days after receipt of the decision or ruling challenged
 During the intervening period, the warrant was premature and could therefore not be served.
 Originally, CIR claimed that the 75K promotional fees to be personal holding company income, but later on conformed to the
decision of CTA
 There is no dispute that the payees duly reported their respective shares of the fees in their income tax returns and paid the
corresponding taxes thereon. CTA also found, after examining the evidence, that no distribution of dividends was involved
 CIR suggests a tax dodge, an attempt to evade a legitimate assessment by involving an imaginary deduction
 Algue Inc. was a family corporation where strict business procedures were not applied and immediate issuance of receipts was not
required. at the end of the year, when the books were to be closed, each payee made an accounting of all of the fees received by
him or her, to make up the total of P75,000.00. This arrangement was understandable in view of the close relationship among the
persons in the family corporation
 The amount of the promotional fees was not excessive. The total commission paid by the Philippine Sugar Estate Development Co.
to Algue Inc. was P125K. After deducting the said fees, Algue still had a balance of P50,000.00 as clear profit from the transaction.
The amount of P75,000.00 was 60% of the total commission. This was a reasonable proportion, considering that it was the payees
who did practically everything, from the formation of the Vegetable Oil Investment Corporation to the actual purchase by it of the
Sugar Estate properties.
 Sec. 30 of the Tax Code: allowed deductions in the net income – Expenses - All the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered xxx
 the burden is on the taxpayer to prove the validity of the claimed deduction
 In this case, Algue Inc. has proved that the payment of the fees was necessary and reasonable in the light of the efforts exerted by
the payees in inducing investors and prominent businessmen to venture in an experimental enterprise and involve themselves in a
new business requiring millions of pesos.
 Taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to
activate and operate it. Hence, despite the natural reluctance to surrender part of one's hard earned income to the taxing
authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is
expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their
moral and material values
 Taxation must be exercised reasonably and in accordance with the prescribed procedure. If it is not, then the taxpayer has a right
to complain and the courts will then come to his succor

Algue Inc.’s appeal from the decision of the CIR was filed on time with the CTA in accordance with Rep. Act No. 1125. And we also find that the
claimed deduction by Algue Inc. was permitted under the Internal Revenue Code and should therefore not have been disallowed by the CIR

G.R. No. 92585 May 8, 1992

CALTEX PHILIPPINES, INC., petitioner,

vs.
THE HONORABLE COMMISSION ON AUDIT, HONORABLE COMMISSIONER BARTOLOME C. FERNANDEZ
and HONORABLE COMMISSIONER ALBERTO P. CRUZ, respondents.

This is a petition erroneously brought under Rule 44 of the Rules of Court 1 questioning the authority of the
Commission on Audit (COA) in disallowing petitioner's claims for reimbursement from the Oil Price Stabilization
Fund (OPSF) and seeking the reversal of said Commission's decision denying its claims for recovery of financing
charges from the Fund and reimbursement of underrecovery arising from sales to the National Power Corporation,
Atlas Consolidated Mining and Development Corporation (ATLAS) and Marcopper Mining Corporation (MAR-
COPPER), preventing it from exercising the right to offset its remittances against its reimbursement vis-a-vis the
OPSF and disallowing its claims which are still pending resolution before the Office of Energy Affairs (OEA) and the
Department of Finance (DOF).

Pursuant to the 1987 Constitution, 2 any decision, order or ruling of the Constitutional Commissions 3 may be brought
to this Court on certiorari by the aggrieved party within thirty (30) days from receipt of a copy thereof.
Thecertiorari referred to is the special civil action for certiorari under Rule 65 of the Rules of Court. 4
Considering, however, that the allegations that the COA acted with:
(a) total lack of jurisdiction in completely ignoring and showing absolutely no respect for the findings and rulings of
the administrator of the fund itself and in disallowing a claim which is still pending resolution at the OEA level, and
(b) "grave abuse of discretion and completely without jurisdiction" 5 in declaring that petitioner cannot avail of the
right to offset any amount that it may be required under the law to remit to the OPSF against any amount that it may
receive by way of reimbursement therefrom are sufficient to bring this petition within Rule 65 of the Rules of Court,
and, considering further the importance of the issues raised, the error in the designation of the remedy pursued will,
in this instance, be excused.

The issues raised revolve around the OPSF created under Section 8 of Presidential Decree (P.D.) No. 1956, as
amended by Executive Order (E.O.) No. 137. As amended, said Section 8 reads as follows:

Sec. 8 . There is hereby created a Trust Account in the books of accounts of the Ministry of Energy
to be designated as Oil Price Stabilization Fund (OPSF) for the purpose of minimizing frequent price
changes brought about by exchange rate adjustments and/or changes in world market prices of
crude oil and imported petroleum products. The Oil Price Stabilization Fund may be sourced from
any of the following:

a) Any increase in the tax collection from ad valorem tax or customs duty imposed on
petroleum products subject to tax under this Decree arising from exchange rate
adjustment, as may be determined by the Minister of Finance in consultation with the
Board of Energy;

b) Any increase in the tax collection as a result of the lifting of tax exemptions of
government corporations, as may be determined by the Minister of Finance in
consultation with the Board of Energy;

c) Any additional amount to be imposed on petroleum products to augment the

resources of the Fund through an appropriate Order that may be issued by the Board
of Energy requiring payment by persons or companies engaged in the business of
importing, manufacturing and/or marketing petroleum products;

d) Any resulting peso cost differentials in case the actual peso costs paid by oil
companies in the importation of crude oil and petroleum products is less than the
peso costs computed using the reference foreign exchange rate as fixed by the
Board of Energy.

The Fund herein created shall be used for the following:

1) To reimburse the oil companies for cost increases in crude oil and imported
petroleum products resulting from exchange rate adjustment and/or increase in world
market prices of crude oil;

2) To reimburse the oil companies for possible cost under-recovery incurred as a

result of the reduction of domestic prices of petroleum products. The magnitude of
the underrecovery, if any, shall be determined by the Ministry of Finance. "Cost
underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy

without the corresponding reduction in the landed cost of oil
inventories in the possession of the oil companies at the time of the
price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing

government mandated price reductions;
 iii. Other factors as may be determined by the Ministry of Finance to
result in cost underrecovery.

The Oil Price Stabilization Fund (OPSF) shall be administered by the Ministry of Energy.

The material operative facts of this case, as gathered from the pleadings of the parties, are not disputed.

On 2 February 1989, the COA sent a letter to Caltex Philippines, Inc. (CPI), hereinafter referred to as Petitioner,
directing the latter to remit to the OPSF its collection, excluding that unremitted for the years 1986 and 1988, of the
additional tax on petroleum products authorized under the aforesaid Section 8 of P.D. No. 1956 which, as of 31
December 1987, amounted to P335,037,649.00 and informing it that, pending such remittance, all of its claims for
reimbursement from the OPSF shall be held in abeyance. 6

On 9 March 1989, the COA sent another letter to petitioner informing it that partial verification with the OEA showed
that the grand total of its unremitted collections of the above tax is P1,287,668,820.00, broken down as follows:

1986 — P233,190,916.00
1987 — 335,065,650.00
1988 — 719,412,254.00;

directing it to remit the same, with interest and surcharges thereon, within sixty (60) days from receipt of the letter;
advising it that the COA will hold in abeyance the audit of all its claims for reimbursement from the OPSF; and
directing it to desist from further offsetting the taxes collected against outstanding claims in 1989 and subsequent
periods. 7

In its letter of 3 May 1989, petitioner requested the COA for an early release of its reimbursement certificates from
the OPSF covering claims with the Office of Energy Affairs since June 1987 up to March 1989, invoking in support
thereof COA Circular No. 89-299 on the lifting of pre-audit of government transactions of national government
agencies and government-owned or controlled corporations. 8

In its Answer dated 8 May 1989, the COA denied petitioner's request for the early release of the reimbursement certificates from the OPSF and repeated its earlier
directive to petitioner to forward payment of the latter's unremitted collections to the OPSF to facilitate COA's audit action on the reimbursement claims. 9

By way of a reply, petitioner, in a letter dated 31 May 1989, submitted to the COA a proposal for the payment of the
collections and the recovery of claims, since the outright payment of the sum of P1.287 billion to the OEA as a
prerequisite for the processing of said claims against the OPSF will cause a very serious impairment of its cash
position. 10 The proposal reads:

We, therefore, very respectfully propose the following:

(1) Any procedural arrangement acceptable to COA to facilitate monitoring of

payments and reimbursements will be administered by the ERB/Finance Dept./OEA,
as agencies designated by law to administer/regulate OPSF.

(2) For the retroactive period, Caltex will deliver to OEA, P1.287 billion as payment to
OPSF, similarly OEA will deliver to Caltex the same amount in cash reimbursement
from OPSF.

(3) The COA audit will commence immediately and will be conducted expeditiously.

(4) The review of current claims (1989) will be conducted expeditiously to preclude
further accumulation of reimbursement from OPSF.

On 7 June 1989, the COA, with the Chairman taking no part, handed down Decision No. 921 accepting the above-
stated proposal but prohibiting petitioner from further offsetting remittances and reimbursements for the current and
ensuing years. 11 Decision No. 921 reads:
 This pertains to the within separate requests of Mr. Manuel A. Estrella, President, Petron
Corporation, and Mr. Francis Ablan, President and Managing Director, Caltex (Philippines) Inc., for
reconsideration of this Commission's adverse action embodied in its letters dated February 2, 1989
and March 9, 1989, the former directing immediate remittance to the Oil Price Stabilization Fund of
collections made by the firms pursuant to P.D. 1956, as amended by E.O. No. 137, S. 1987, and the
latter reiterating the same directive but further advising the firms to desist from offsetting collections
against their claims with the notice that "this Commission will hold in abeyance the audit of all . . .
claims for reimbursement from the OPSF."

It appears that under letters of authority issued by the Chairman, Energy Regulatory Board, the
aforenamed oil companies were allowed to offset the amounts due to the Oil Price Stabilization Fund
against their outstanding claims from the said Fund for the calendar years 1987 and 1988, pending
with the then Ministry of Energy, the government entity charged with administering the OPSF. This
Commission, however, expressing serious doubts as to the propriety of the offsetting of all types of
reimbursements from the OPSF against all categories of remittances, advised these oil companies
that such offsetting was bereft of legal basis. Aggrieved thereby, these companies now seek
reconsideration and in support thereof clearly manifest their intent to make arrangements for the
remittance to the Office of Energy Affairs of the amount of collections equivalent to what has been
previously offset, provided that this Commission authorizes the Office of Energy Affairs to prepare
the corresponding checks representing reimbursement from the OPSF. It is alleged that the
implementation of such an arrangement, whereby the remittance of collections due to the OPSF and
the reimbursement of claims from the Fund shall be made within a period of not more than one week
from each other, will benefit the Fund and not unduly jeopardize the continuing daily cash
requirements of these firms.

Upon a circumspect evaluation of the circumstances herein obtaining, this Commission perceives no
further objectionable feature in the proposed arrangement, provided that 15% of whatever amount is
due from the Fund is retained by the Office of Energy Affairs, the same to be answerable for
suspensions or disallowances, errors or discrepancies which may be noted in the course of audit
and surcharges for late remittances without prejudice to similar future retentions to answer for any
deficiency in such surcharges, and provided further that no offsetting of remittances and
reimbursements for the current and ensuing years shall be allowed.

Pursuant to this decision, the COA, on 18 August 1989, sent the following letter to Executive Director Wenceslao R.
De la Paz of the Office of Energy Affairs: 12

Dear Atty. dela Paz:

Pursuant to the Commission on Audit Decision No. 921 dated June 7, 1989, and based on our initial
verification of documents submitted to us by your Office in support of Caltex (Philippines), Inc.
offsets (sic) for the year 1986 to May 31, 1989, as well as its outstanding claims against the Oil Price
Stabilization Fund (OPSF) as of May 31, 1989, we are pleased to inform your Office that Caltex
(Philippines), Inc. shall be required to remit to OPSF an amount of P1,505,668,906, representing
remittances to the OPSF which were offset against its claims reimbursements (net of unsubmitted
claims). In addition, the Commission hereby authorize (sic) the Office of Energy Affairs (OEA) to
cause payment of P1,959,182,612 to Caltex, representing claims initially allowed in audit, the details
of which are presented hereunder: . . .

As presented in the foregoing computation the disallowances totalled P387,683,535, which included
P130,420,235 representing those claims disallowed by OEA, details of which is (sic) shown in
Schedule 1 as summarized as follows:

Disallowance of COA
Particulars Amount

Recovery of financing charges P162,728,475 /a

Product sales 48,402,398 /b
Inventory losses
 Borrow loan arrangement 14,034,786 /c
Sales to Atlas/Marcopper 32,097,083 /d
Sales to NPC 558
——————
P257,263,300

Disallowances of OEA 130,420,235

————————— ——————
Total P387,683,535

The reasons for the disallowances are discussed hereunder:

a. Recovery of Financing Charges

Review of the provisions of P.D. 1596 as amended by E.O. 137 seems to indicate that recovery of
financing charges by oil companies is not among the items for which the OPSF may be utilized.
Therefore, it is our view that recovery of financing charges has no legal basis. The mechanism for
such claims is provided in DOF Circular 1-87.

b. Product Sales –– Sales to International Vessels/Airlines

BOE Resolution No. 87-01 dated February 7, 1987 as implemented by OEA Order No. 87-03-095
indicating that (sic) February 7, 1987 as the effectivity date that (sic) oil companies should pay OPSF
impost on export sales of petroleum products. Effective February 7, 1987 sales to international
vessels/airlines should not be included as part of its domestic sales. Changing the effectivity date of
the resolution from February 7, 1987 to October 20, 1987 as covered by subsequent ERB
Resolution No. 88-12 dated November 18, 1988 has allowed Caltex to include in their domestic
sales volumes to international vessels/airlines and claim the corresponding reimbursements from
OPSF during the period. It is our opinion that the effectivity of the said resolution should be February
7, 1987.

c. Inventory losses –– Settlement of Ad Valorem

We reviewed the system of handling Borrow and Loan (BLA) transactions including the related BLA
agreement, as they affect the claims for reimbursements of ad valorem taxes. We observed that oil
companies immediately settle ad valorem taxes for BLA transaction (sic). Loan balances therefore
are not tax paid inventories of Caltex subject to reimbursements but those of the borrower. Hence,
we recommend reduction of the claim for July, August, and November, 1987 amounting to
P14,034,786.

d. Sales to Atlas/Marcopper

LOI No. 1416 dated July 17, 1984 provides that "I hereby order and direct the suspension of
payment of all taxes, duties, fees, imposts and other charges whether direct or indirect due and
payable by the copper mining companies in distress to the national and local governments." It is our
opinion that LOI 1416 which implements the exemption from payment of OPSF imposts as effected
by OEA has no legal basis.

Furthermore, we wish to emphasize that payment to Caltex (Phil.) Inc., of the amount as herein
authorized shall be subject to availability of funds of OPSF as of May 31, 1989 and applicable
auditing rules and regulations. With regard to the disallowances, it is further informed that the
aggrieved party has 30 days within which to appeal the decision of the Commission in accordance
with law.

On 8 September 1989, petitioner filed an Omnibus Request for the Reconsideration of the decision based on the
following grounds: 13
 A) COA-DISALLOWED CLAIMS ARE AUTHORIZED UNDER EXISTING RULES, ORDERS,
RESOLUTIONS, CIRCULARS ISSUED BY THE DEPARTMENT OF FINANCE AND THE ENERGY
REGULATORY BOARD PURSUANT TO EXECUTIVE ORDER NO. 137.

xxx xxx xxx

B) ADMINISTRATIVE INTERPRETATIONS IN THE COURSE OF EXERCISE OF EXECUTIVE

POWER BY DEPARTMENT OF FINANCE AND ENERGY REGULATORY BOARD ARE LEGAL
AND SHOULD BE RESPECTED AND APPLIED UNLESS DECLARED NULL AND VOID BY
COURTS OR REPEALED BY LEGISLATION.

xxx xxx xxx

C) LEGAL BASIS FOR RETENTION OF OFFSET ARRANGEMENT, AS AUTHORIZED BY THE

EXECUTIVE BRANCH OF GOVERNMENT, REMAINS VALID.

xxx xxx xxx

On 6 November 1989, petitioner filed with the COA a Supplemental Omnibus Request for Reconsideration. 14

On 16 February 1990, the COA, with Chairman Domingo taking no part and with Commissioner Fernandez
dissenting in part, handed down Decision No. 1171 affirming the disallowance for recovery of financing charges,
inventory losses, and sales to MARCOPPER and ATLAS, while allowing the recovery of product sales or those
arising from export sales. 15 Decision No. 1171 reads as follows:

Anent the recovery of financing charges you contend that Caltex Phil. Inc. has the .authority to
recover financing charges from the OPSF on the basis of Department of Finance (DOF) Circular 1-
87, dated February 18, 1987, which allowed oil companies to "recover cost of financing working
capital associated with crude oil shipments," and provided a schedule of reimbursement in terms of
peso per barrel. It appears that on November 6, 1989, the DOF issued a memorandum to the
President of the Philippines explaining the nature of these financing charges and justifying their
reimbursement as follows:

As part of your program to promote economic recovery, . . . oil companies (were

authorized) to refinance their imports of crude oil and petroleum products from the
normal trade credit of 30 days up to 360 days from date of loading . . . Conformably .
. ., the oil companies deferred their foreign exchange remittances for purchases by
refinancing their import bills from the normal 30-day payment term up to the desired
360 days. This refinancing of importations carried additional costs (financing
charges) which then became, due to government mandate, an inherent part of the
cost of the purchases of our country's oil requirement.

We beg to disagree with such contention. The justification that financing charges increased oil costs
and the schedule of reimbursement rate in peso per barrel (Exhibit 1) used to support alleged
increase (sic) were not validated in our independent inquiry. As manifested in Exhibit 2, using the
same formula which the DOF used in arriving at the reimbursement rate but using comparable
percentages instead of pesos, the ineluctable conclusion is that the oil companies are actually
gaining rather than losing from the extension of credit because such extension enables them to
invest the collections in marketable securities which have much higher rates than those they incur
due to the extension. The Data we used were obtained from CPI (CALTEX) Management and can
easily be verified from our records.

With respect to product sales or those arising from sales to international vessels or airlines, . . ., it is
believed that export sales (product sales) are entitled to claim refund from the OPSF.
 As regard your claim for underrecovery arising from inventory losses, . . . It is the considered view of
this Commission that the OPSF is not liable to refund such surtax on inventory losses because these
are paid to BIR and not OPSF, in view of which CPI (CALTEX) should seek refund from BIR. . . .

Finally, as regards the sales to Atlas and Marcopper, it is represented that you are entitled to claim
recovery from the OPSF pursuant to LOI 1416 issued on July 17, 1984, since these copper mining
companies did not pay CPI (CALTEX) and OPSF imposts which were added to the selling price.

Upon a circumspect evaluation, this Commission believes and so holds that the CPI (CALTEX) has
no authority to claim reimbursement for this uncollected OPSF impost because LOI 1416 dated July
17, 1984, which exempts distressed mining companies from "all taxes, duties, import fees and other
charges" was issued when OPSF was not yet in existence and could not have contemplated OPSF
imposts at the time of its formulation. Moreover, it is evident that OPSF was not created to aid
distressed mining companies but rather to help the domestic oil industry by stabilizing oil prices.

Unsatisfied with the decision, petitioner filed on 28 March 1990 the present petition wherein it imputes to the COA
the commission of the following errors: 16

RESPONDENT COMMISSION ERRED IN DISALLOWING RECOVERY OF FINANCING

CHARGES FROM THE OPSF.

II

RESPONDENT COMMISSION ERRED IN DISALLOWING

CPI's 17 CLAIM FOR REIMBURSEMENT OF UNDERRECOVERY ARISING FROM SALES TO NPC.

III

RESPONDENT COMMISSION ERRED IN DENYING CPI's CLAIMS FOR REIMBURSEMENT ON

SALES TO ATLAS AND MARCOPPER.

IV

RESPONDENT COMMISSION ERRED IN PREVENTING CPI FROM EXERCISING ITS LEGAL

RIGHT TO OFFSET ITS REMITTANCES AGAINST ITS REIMBURSEMENT VIS-A-VIS THE OPSF.

RESPONDENT COMMISSION ERRED IN DISALLOWING CPI's CLAIMS WHICH ARE STILL

PENDING RESOLUTION BY (SIC) THE OEA AND THE DOF.

In the Resolution of 5 April 1990, this Court required the respondents to comment on the petition within ten (10)
days from notice. 18

On 6 September 1990, respondents COA and Commissioners Fernandez and Cruz, assisted by the Office of the
Solicitor General, filed their Comment. 19

This Court resolved to give due course to this petition on 30 May 1991 and required the parties to file their
respective Memoranda within twenty (20) days from notice. 20

In a Manifestation dated 18 July 1991, the Office of the Solicitor General prays that the Comment filed on 6
September 1990 be considered as the Memorandum for respondents. 21

Upon the other hand, petitioner filed its Memorandum on 14 August 1991.
I. Petitioner dwells lengthily on its first assigned error contending, in support thereof, that:

(1) In view of the expanded role of the OPSF pursuant to Executive Order No. 137, which added a second purpose,
to wit:

2) To reimburse the oil companies for possible cost underrecovery incurred as a result of the
reduction of domestic prices of petroleum products. The magnitude of the underrecovery, if any,
shall be determined by the Ministry of Finance. "Cost underrecovery" shall include the following:

i. Reduction in oil company take as directed by the Board of Energy without the
corresponding reduction in the landed cost of oil inventories in the possession of the
oil companies at the time of the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government

mandated price reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost
underrecovery.

the "other factors" mentioned therein that may be determined by the Ministry (now Department) of Finance may
include financing charges for "in essence, financing charges constitute unrecovered cost of acquisition of crude oil
incurred by the oil companies," as explained in the 6 November 1989 Memorandum to the President of the
Department of Finance; they "directly translate to cost underrecovery in cases where the money market placement
rates decline and at the same time the tax on interest income increases. The relationship is such that the presence
of underrecovery or overrecovery is directly dependent on the amount and extent of financing charges."

(2) The claim for recovery of financing charges has clear legal and factual basis; it was filed on the basis of
Department of Finance Circular No.
1-87, dated 18 February 1987, which provides:

To allow oil companies to recover the costs of financing working capital associated with crude oil
shipments, the following guidelines on the utilization of the Oil Price Stabilization Fund pertaining to
the payment of the foregoing (sic) exchange risk premium and recovery of financing charges will be
implemented:

1. The OPSF foreign exchange premium shall be reduced to a flat rate of one (1)
percent for the first (6) months and 1/32 of one percent per month thereafter up to a
maximum period of one year, to be applied on crude oil' shipments from January 1,
1987. Shipments with outstanding financing as of January 1, 1987 shall be charged
on the basis of the fee applicable to the remaining period of financing.

2. In addition, for shipments loaded after January 1987, oil companies shall be
allowed to recover financing charges directly from the OPSF per barrel of crude oil
based on the following schedule:

Financing
Period
Reimbursemen
t Rate
Pesos per
Barrel

Less than 180 days None

180 days to 239 days 1.90
241 (sic) days to 299 4.02
300 days to 369 (sic) days 6.16
360 days or more 8.28
 The above rates shall be subject to review every sixty
days. 22

Pursuant to this circular, the Department of Finance, in its letter of 18 February 1987, advised the Office of Energy
Affairs as follows:

HON. VICENTE T. PATERNO

Deputy Executive Secretary
For Energy Affairs
Office of the President
Makati, Metro Manila

Dear Sir:

This refers to the letters of the Oil Industry dated December 4, 1986 and February 5, 1987 and
subsequent discussions held by the Price Review committee on February 6, 1987.

On the basis of the representations made, the Department of Finance recognizes the necessity to
reduce the foreign exchange risk premium accruing to the Oil Price Stabilization Fund (OPSF). Such
a reduction would allow the industry to recover partly associated financing charges on crude oil
imports. Accordingly, the OPSF foreign exchange risk fee shall be reduced to a flat charge of 1% for
the first six (6) months plus 1/32% of 1% per month thereafter up to a maximum period of one year,
effective January 1, 1987. In addition, since the prevailing company take would still leave
unrecovered financing charges, reimbursement may be secured from the OPSF in accordance with
the provisions of the attached Department of Finance circular. 23

Acting on this letter, the OEA issued on 4 May 1987 Order No. 87-05-096 which contains the guidelines for the
computation of the foreign exchange risk fee and the recovery of financing charges from the OPSF, to wit:

B. FINANCE CHARGES

1. Oil companies shall be allowed to recover financing charges directly from the
OPSF for both crude and product shipments loaded after January 1, 1987 based on
the following rates:

Financing
Period
Reimbursemen
t Rate
(PBbl.)

Less than 180 days None

180 days to 239 days 1.90
240 days to 229 (sic) days 4.02
300 days to 359 days 6.16
360 days to more 8.28

2. The above rates shall be subject to review every sixty days. 24

Then on 22 November 1988, the Department of Finance issued Circular No. 4-88 imposing further guidelines on the
recoverability of financing charges, to wit:

Following are the supplemental rules to Department of Finance Circular No. 1-87 dated February 18,
1987 which allowed the recovery of financing charges directly from the Oil Price Stabilization Fund.
(OPSF):

1. The Claim for reimbursement shall be on a per shipment basis.

 2. The claim shall be filed with the Office of Energy Affairs together with the claim on
peso cost differential for a particular shipment and duly certified supporting
documents provided for under Ministry of Finance No. 11-85.

3. The reimbursement shall be on the form of reimbursement certificate (Annex A) to

be issued by the Office of Energy Affairs. The said certificate may be used to offset
against amounts payable to the OPSF. The oil companies may also redeem said
certificates in cash if not utilized, subject to availability of funds. 25

The OEA disseminated this Circular to all oil companies in its Memorandum Circular No. 88-12-017. 26

The COA can neither ignore these issuances nor formulate its own interpretation of the laws in the light of the
determination of executive agencies. The determination by the Department of Finance and the OEA that financing
charges are recoverable from the OPSF is entitled to great weight and consideration. 27 The function of the COA,
particularly in the matter of allowing or disallowing certain expenditures, is limited to the promulgation of accounting
and auditing rules for, among others, the disallowance of irregular, unnecessary, excessive, extravagant, or
unconscionable expenditures, or uses of government funds and properties. 28

(3) Denial of petitioner's claim for reimbursement would be inequitable. Additionally, COA's claim that petitioner is
gaining, instead of losing, from the extension of credit, is belatedly raised and not supported by expert analysis.

In impeaching the validity of petitioner's assertions, the respondents argue that:

1. The Constitution gives the COA discretionary power to disapprove irregular or unnecessary
government expenditures and as the monetary claims of petitioner are not allowed by law, the COA
acted within its jurisdiction in denying them;

2. P.D. No. 1956 and E.O. No. 137 do not allow reimbursement of financing charges from the OPSF;

3. Under the principle of ejusdem generis, the "other factors" mentioned in the second purpose of the
OPSF pursuant to E.O. No. 137 can only include "factors which are of the same nature or analogous
to those enumerated;"

4. In allowing reimbursement of financing charges from OPSF, Circular No. 1-87 of the Department
of Finance violates P.D. No. 1956 and E.O. No. 137; and

5. Department of Finance rules and regulations implementing P.D. No. 1956 do not likewise allow
reimbursement of financing
charges. 29

We find no merit in the first assigned error.

As to the power of the COA, which must first be resolved in view of its primacy, We find the theory of petitioner ––
that such does not extend to the disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable
expenditures, or use of government funds and properties, but only to the promulgation of accounting and auditing
rules for, among others, such disallowance –– to be untenable in the light of the provisions of the 1987 Constitution
and related laws.

Section 2, Subdivision D, Article IX of the 1987 Constitution expressly provides:

Sec. 2(l). The Commission on Audit shall have the power, authority, and duty to examine, audit, and
settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of funds and
property, owned or held in trust by, or pertaining to, the Government, or any of its subdivisions,
agencies, or instrumentalities, including government-owned and controlled corporations with original
charters, and on a post-audit basis: (a) constitutional bodies, commissions and offices that have
been granted fiscal autonomy under this Constitution; (b) autonomous state colleges and
universities; (c) other government-owned or controlled corporations and their subsidiaries; and (d)
 such non-governmental entities receiving subsidy or equity, directly or indirectly, from or through the
government, which are required by law or the granting institution to submit to such audit as a
condition of subsidy or equity. However, where the internal control system of the audited agencies is
inadequate, the Commission may adopt such measures, including temporary or special pre-audit, as
are necessary and appropriate to correct the deficiencies. It shall keep the general accounts, of the
Government and, for such period as may be provided by law, preserve the vouchers and other
supporting papers pertaining thereto.

(2) The Commission shall have exclusive authority, subject to the limitations in this Article, to define
the scope of its audit and examination, establish the techniques and methods required therefor, and
promulgate accounting and auditing rules and regulations, including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or, unconscionable expenditures, or
uses of government funds and properties.

These present powers, consistent with the declared independence of the Commission, 30 are broader and more
extensive than that conferred by the 1973 Constitution. Under the latter, the Commission was empowered to:

Examine, audit, and settle, in accordance with law and regulations, all accounts pertaining to the
revenues, and receipts of, and expenditures or uses of funds and property, owned or held in trust by,
or pertaining to, the Government, or any of its subdivisions, agencies, or instrumentalities including
government-owned or controlled corporations, keep the general accounts of the Government and,
for such period as may be provided by law, preserve the vouchers pertaining thereto; and
promulgate accounting and auditing rules and regulations including those for the prevention of
irregular, unnecessary, excessive, or extravagant expenditures or uses of funds and property. 31

Upon the other hand, under the 1935 Constitution, the power and authority of the COA's precursor, the General
Auditing Office, were, unfortunately, limited; its very role was markedly passive. Section 2 of Article XI
thereofprovided:

Sec. 2. The Auditor General shall examine, audit, and settle all accounts pertaining to the revenues
and receipts from whatever source, including trust funds derived from bond issues; and audit, in
accordance with law and administrative regulations, all expenditures of funds or property pertaining
to or held in trust by the Government or the provinces or municipalities thereof. He shall keep the
general accounts of the Government and the preserve the vouchers pertaining thereto. It shall be the
duty of the Auditor General to bring to the attention of the proper administrative officer expenditures
of funds or property which, in his opinion, are irregular, unnecessary, excessive, or extravagant. He
shall also perform such other functions as may be prescribed by law.

As clearly shown above, in respect to irregular, unnecessary, excessive or extravagant expenditures or uses of
funds, the 1935 Constitution did not grant the Auditor General the power to issue rules and regulations to prevent
the same. His was merely to bring that matter to the attention of the proper administrative officer.

The ruling on this particular point, quoted by petitioner from the cases of Guevarra vs. Gimenez 32 and Ramos
vs.Aquino, 33 are no longer controlling as the two (2) were decided in the light of the 1935 Constitution.

There can be no doubt, however, that the audit power of the Auditor General under the 1935 Constitution and the
Commission on Audit under the 1973 Constitution authorized them to disallow illegal expenditures of funds or uses
of funds and property. Our present Constitution retains that same power and authority, further strengthened by the
definition of the COA's general jurisdiction in Section 26 of the Government Auditing Code of the Philippines 34and
Administrative Code of 1987. 35 Pursuant to its power to promulgate accounting and auditing rules and regulations
for the prevention of irregular, unnecessary, excessive or extravagant expenditures or uses of funds,36 the COA
promulgated on 29 March 1977 COA Circular No. 77-55. Since the COA is responsible for the enforcement of the
rules and regulations, it goes without saying that failure to comply with them is a ground for disapproving the
payment of the proposed expenditure. As observed by one of the Commissioners of the 1986 Constitutional
Commission, Fr. Joaquin G. Bernas: 37

It should be noted, however, that whereas under Article XI, Section 2, of the 1935 Constitution the
Auditor General could not correct "irregular, unnecessary, excessive or extravagant" expenditures of
 public funds but could only "bring [the matter] to the attention of the proper administrative officer,"
under the 1987 Constitution, as also under the 1973 Constitution, the Commission on Audit can
"promulgate accounting and auditing rules and regulations including those for the prevention and
disallowance of irregular, unnecessary, excessive, extravagant, or unconscionable expenditures or
uses of government funds and properties." Hence, since the Commission on Audit must ultimately
be responsible for the enforcement of these rules and regulations, the failure to comply with these
regulations can be a ground for disapproving the payment of a proposed expenditure.

Indeed, when the framers of the last two (2) Constitutions conferred upon the COA a more active role and invested it
with broader and more extensive powers, they did not intend merely to make the COA a toothless tiger, but rather
envisioned a dynamic, effective, efficient and independent watchdog of the Government.

The issue of the financing charges boils down to the validity of Department of Finance Circular No. 1-87,
Department of Finance Circular No. 4-88 and the implementing circulars of the OEA, issued pursuant to Section 8,
P.D. No. 1956, as amended by E.O. No. 137, authorizing it to determine "other factors" which may result in cost
underrecovery and a consequent reimbursement from the OPSF.

The Solicitor General maintains that, following the doctrine of ejusdem generis, financing charges are not included in
"cost underrecovery" and, therefore, cannot be considered as one of the "other factors." Section 8 of P.D. No. 1956,
as amended by E.O. No. 137, does not explicitly define what "cost underrecovery" is. It merely states what it
includes. Thus:

. . . "Cost underrecovery" shall include the following:

i. Reduction in oil company takes as directed by the Board of Energy without the corresponding
reduction in the landed cost of oil inventories in the possession of the oil companies at the time of
the price change;

ii. Reduction in internal ad valorem taxes as a result of foregoing government mandated price
reductions;

iii. Other factors as may be determined by the Ministry of Finance to result in cost underrecovery.

These "other factors" can include only those which are of the same class or nature as the two specifically
enumerated in subparagraphs (i) and (ii). A common characteristic of both is that they are in the nature of
government mandated price reductions. Hence, any other factor which seeks to be a part of the enumeration, or
which could qualify as a cost underrecovery, must be of the same class or nature as those specifically enumerated.

Petitioner, however, suggests that E.O. No. 137 intended to grant the Department of Finance broad and unrestricted
authority to determine or define "other factors."

Both views are unacceptable to this Court.

The rule of ejusdem generis states that "[w]here general words follow an enumeration of persons or things, by
words of a particular and specific meaning, such general words are not to be construed in their widest extent, but
are held to be as applying only to persons or things of the same kind or class as those specifically mentioned. 38 A
reading of subparagraphs (i) and (ii) easily discloses that they do not have a common characteristic. The first relates
to price reduction as directed by the Board of Energy while the second refers to reduction in internal ad
valorem taxes. Therefore, subparagraph (iii) cannot be limited by the enumeration in these subparagraphs. What
should be considered for purposes of determining the "other factors" in subparagraph (iii) is the first sentence of
paragraph (2) of the Section which explicitly allows cost underrecovery only if such were incurred as a result of the
reduction of domestic prices of petroleum products.

Although petitioner's financing losses, if indeed incurred, may constitute cost underrecovery in the sense that such
were incurred as a result of the inability to fully offset financing expenses from yields in money market placements,
they do not, however, fall under the foregoing provision of P.D. No. 1956, as amended, because the same did not
result from the reduction of the domestic price of petroleum products. Until paragraph (2), Section 8 of the decree,
as amended, is further amended by Congress, this Court can do nothing. The duty of this Court is not to legislate,
but to apply or interpret the law. Be that as it may, this Court wishes to emphasize that as the facts in this case have
shown, it was at the behest of the Government that petitioner refinanced its oil import payments from the normal 30-
day trade credit to a maximum of 360 days. Petitioner could be correct in its assertion that owing to the extended
period for payment, the financial institution which refinanced said payments charged a higher interest, thereby
resulting in higher financing expenses for the petitioner. It would appear then that equity considerations dictate that
petitioner should somehow be allowed to recover its financing losses, if any, which may have been sustained
because it accommodated the request of the Government. Although under Section 29 of the National Internal
Revenue Code such losses may be deducted from gross income, the effect of that loss would be merely to reduce
its taxable income, but not to actually wipe out such losses. The Government then may consider some positive
measures to help petitioner and others similarly situated to obtain substantial relief. An amendment, as aforestated,
may then be in order.

Upon the other hand, to accept petitioner's theory of "unrestricted authority" on the part of the Department of
Finance to determine or define "other factors" is to uphold an undue delegation of legislative power, it clearly
appearing that the subject provision does not provide any standard for the exercise of the authority. It is a
fundamental rule that delegation of legislative power may be sustained only upon the ground that some standard for
its exercise is provided and that the legislature, in making the delegation, has prescribed the manner of the exercise
of the delegated authority. 39

Finally, whether petitioner gained or lost by reason of the extensive credit is rendered irrelevant by reason of the
foregoing disquisitions. It may nevertheless be stated that petitioner failed to disprove COA's claim that it had in fact
gained in the process. Otherwise stated, petitioner failed to sufficiently show that it incurred a loss. Such being the
case, how can petitioner claim for reimbursement? It cannot have its cake and eat it too.

II. Anent the claims arising from sales to the National Power Corporation, We find for the petitioner. The
respondents themselves admit in their Comment that underrecovery arising from sales to NPC are reimbursable
because NPC was granted full exemption from the payment of taxes; to prove this, respondents trace the laws
providing for such exemption. 40 The last law cited is the Fiscal Incentives Regulatory Board's Resolution No. 17-87
of 24 June 1987 which provides, in part, "that the tax and duty exemption privileges of the National Power
Corporation, including those pertaining to its domestic purchases of petroleum and petroleum products . . . are
restored effective March 10, 1987." In a Memorandum issued on 5 October 1987 by the Office of the President,
NPC's tax exemption was confirmed and approved.

Furthermore, as pointed out by respondents, the intention to exempt sales of petroleum products to the NPC is
evident in the recently passed Republic Act No. 6952 establishing the Petroleum Price Standby Fund to support the
OPSF. 41 The pertinent part of Section 2, Republic Act No. 6952 provides:

Sec. 2. Application of the Fund shall be subject to the following conditions:

(1) That the Fund shall be used to reimburse the oil companies for (a) cost increases
of imported crude oil and finished petroleum products resulting from foreign
exchange rate adjustments and/or increases in world market prices of crude oil;
(b) cost underrecovery incurred as a result of fuel oil sales to the National Power
Corporation (NPC); and (c) other cost underrecoveries incurred as may be finally
decided by the Supreme
Court; . . .

Hence, petitioner can recover its claim arising from sales of petroleum products to the National Power Corporation.

III. With respect to its claim for reimbursement on sales to ATLAS and MARCOPPER, petitioner relies on Letter of
Instruction (LOI) 1416, dated 17 July 1984, which ordered the suspension of payments of all taxes, duties, fees and
other charges, whether direct or indirect, due and payable by the copper mining companies in distress to the
national government. Pursuant to this LOI, then Minister of Energy, Hon. Geronimo Velasco, issued Memorandum
Circular No. 84-11-22 advising the oil companies that Atlas Consolidated Mining Corporation and Marcopper Mining
Corporation are among those declared to be in distress.
In denying the claims arising from sales to ATLAS and MARCOPPER, the COA, in its 18 August 1989 letter to
Executive Director Wenceslao R. de la Paz, states that "it is our opinion that LOI 1416 which implements the
exemption from payment of OPSF imposts as effected by OEA has no legal basis;" 42 in its Decision No. 1171, it
ruled that "the CPI (CALTEX) (Caltex) has no authority to claim reimbursement for this uncollected impost because
LOI 1416 dated July 17, 1984, . . . was issued when OPSF was not yet in existence and could not have
contemplated OPSF imposts at the time of its formulation." 43 It is further stated that: "Moreover, it is evident that
OPSF was not created to aid distressed mining companies but rather to help the domestic oil industry by stabilizing
oil prices."

In sustaining COA's stand, respondents vigorously maintain that LOI 1416 could not have intended to exempt said
distressed mining companies from the payment of OPSF dues for the following reasons:

a. LOI 1416 granting the alleged exemption was issued on July 17, 1984. P.D. 1956 creating the
OPSF was promulgated on October 10, 1984, while E.O. 137, amending P.D. 1956, was issued on
February 25, 1987.

b. LOI 1416 was issued in 1984 to assist distressed copper mining companies in line with the
government's effort to prevent the collapse of the copper industry. P.D No. 1956, as amended, was
issued for the purpose of minimizing frequent price changes brought about by exchange rate
adjustments and/or changes in world market prices of crude oil and imported petroleum product's;
and

c. LOI 1416 caused the "suspension of all taxes, duties, fees, imposts and other charges, whether
direct or indirect, due and payable by the copper mining companies in distress to the Notional and
Local Governments . . ." On the other hand, OPSF dues are not payable by (sic) distressed copper
companies but by oil companies. It is to be noted that the copper mining companies do not pay
OPSF dues. Rather, such imposts are built in or already incorporated in the prices of oil products. 44

Lastly, respondents allege that while LOI 1416 suspends the payment of taxes by distressed mining companies, it
does not accord petitioner the same privilege with respect to its obligation to pay OPSF dues.

We concur with the disquisitions of the respondents. Aside from such reasons, however, it is apparent that LOI 1416
was never published in the Official Gazette 45 as required by Article 2 of the Civil Code, which reads:

Laws shall take effect after fifteen days following the completion of their publication in the Official
Gazette, unless it is otherwise provided. . . .

In applying said provision, this Court ruled in the case of Tañada vs. Tuvera: 46

WHEREFORE, the Court hereby orders respondents to publish in the Official Gazette all
unpublished presidential issuances which are of general application, and unless so published they
shall have no binding force and effect.

Resolving the motion for reconsideration of said decision, this Court, in its Resolution promulgated on 29 December
1986, 47 ruled:

We hold therefore that all statutes, including those of local application and private laws, shall be
published as a condition for their effectivity, which shall begin fifteen days after publication unless a
different effectivity date is fixed by the legislature.

Covered by this rule are presidential decrees and executive orders promulgated by the President in
the exercise of legislative powers whenever the same are validly delegated by the legislature or, at
present, directly conferred by the Constitution. Administrative rules and regulations must also be
published if their purpose is to enforce or implement existing laws pursuant also to a valid
delegation.

xxx xxx xxx

 WHEREFORE, it is hereby declared that all laws as above defined shall immediately upon their
approval, or as soon thereafter as possible, be published in full in the Official Gazette, to become
effective only after fifteen days from their publication, or on another date specified by the legislature,
in accordance with Article 2 of the Civil Code.

LOI 1416 has, therefore, no binding force or effect as it was never published in the Official Gazette after its issuance
or at any time after the decision in the abovementioned cases.

Article 2 of the Civil Code was, however, later amended by Executive Order No. 200, issued on 18 June 1987. As
amended, the said provision now reads:

Laws shall take effect after fifteen days following the completion of their publication either in the
Official Gazette or in a newspaper of general circulation in the Philippines, unless it is
otherwiseprovided.

We are not aware of the publication of LOI 1416 in any newspaper of general circulation pursuant to Executive
Order No. 200.

Furthermore, even granting arguendo that LOI 1416 has force and effect, petitioner's claim must still fail. Tax
exemptions as a general rule are construed strictly against the grantee and liberally in favor of the taxing
authority.48 The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the
exemption so claimed. The party claiming exemption must therefore be expressly mentioned in the exempting law or
at least be within its purview by clear legislative intent.

In the case at bar, petitioner failed to prove that it is entitled, as a consequence of its sales to ATLAS and
MARCOPPER, to claim reimbursement from the OPSF under LOI 1416. Though LOI 1416 may suspend the
payment of taxes by copper mining companies, it does not give petitioner the same privilege with respect to the
payment of OPSF dues.

IV. As to COA's disallowance of the amount of P130,420,235.00, petitioner maintains that the Department of
Finance has still to issue a final and definitive ruling thereon; accordingly, it was premature for COA to disallow it. By
doing so, the latter acted beyond its jurisdiction. 49 Respondents, on the other hand, contend that said amount was
already disallowed by the OEA for failure to substantiate it. 50 In fact, when OEA submitted the claims of petitioner for
pre-audit, the abovementioned amount was already excluded.

An examination of the records of this case shows that petitioner failed to prove or substantiate its contention that the
amount of P130,420,235.00 is still pending before the OEA and the DOF. Additionally, We find no reason to doubt
the submission of respondents that said amount has already been passed upon by the OEA. Hence, the ruling of
respondent COA disapproving said claim must be upheld.

V. The last issue to be resolved in this case is whether or not the amounts due to the OPSF from petitioner may be
offset against petitioner's outstanding claims from said fund. Petitioner contends that it should be allowed to offset
its claims from the OPSF against its contributions to the fund as this has been allowed in the past, particularly in the
years 1987 and 1988. 51

Furthermore, petitioner cites, as bases for offsetting, the provisions of the New Civil Code on compensation and
Section 21, Book V, Title I-B of the Revised Administrative Code which provides for "Retention of Money for
Satisfaction of Indebtedness to Government." 52 Petitioner also mentions communications from the Board of Energy
and the Department of Finance that supposedly authorize compensation.

Respondents, on the other hand, citing Francia vs. IAC and Fernandez, 53 contend that there can be no offsetting of
taxes against the claims that a taxpayer may have against the government, as taxes do not arise from contracts or
depend upon the will of the taxpayer, but are imposed by law. Respondents also allege that petitioner's reliance on
Section 21, Book V, Title I-B of the Revised Administrative Code, is misplaced because "while this provision
empowers the COA to withhold payment of a government indebtedness to a person who is also indebted to the
government and apply the government indebtedness to the satisfaction of the obligation of the person to the
government, like authority or right to make compensation is not given to the private person." 54 The reason for this,
as stated in Commissioner of Internal Revenue vs. Algue, Inc., 55 is that money due the government, either in the
form of taxes or other dues, is its lifeblood and should be collected without hindrance. Thus, instead of giving
petitioner a reason for compensation or set-off, the Revised Administrative Code makes it the respondents' duty to
collect petitioner's indebtedness to the OPSF.

Refuting respondents' contention, petitioner claims that the amounts due from it do not arise as a result of taxation
because "P.D. 1956, amended, did not create a source of taxation; it instead established a special fund . . .," 56and
that the OPSF contributions do not go to the general fund of the state and are not used for public purpose,i.e., not
for the support of the government, the administration of law, or the payment of public expenses. This alleged lack of
a public purpose behind OPSF exactions distinguishes such from a tax. Hence, the ruling in theFrancia case is
inapplicable.

Lastly, petitioner cites R.A. No. 6952 creating the Petroleum Price Standby Fund to support the OPSF; the said law
provides in part that:

Sec. 2. Application of the fund shall be subject to the following conditions:

xxx xxx xxx

(3) That no amount of the Petroleum Price Standby Fund shall be used to pay any oil
company which has an outstanding obligation to the Government without said
obligation being offset first, subject to the requirements of compensation or offset
under the Civil Code.

We find no merit in petitioner's contention that the OPSF contributions are not for a public purpose because they go
to a special fund of the government. Taxation is no longer envisioned as a measure merely to raise revenue to
support the existence of the government; taxes may be levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is affected with public interest as to be within the police
power of the state. 57 There can be no doubt that the oil industry is greatly imbued with public interest as it vitally
affects the general welfare. Any unregulated increase in oil prices could hurt the lives of a majority of the people and
cause economic crisis of untold proportions. It would have a chain reaction in terms of, among others, demands for
wage increases and upward spiralling of the cost of basic commodities. The stabilization then of oil prices is of prime
concern which the state, via its police power, may properly address.

Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly provides that the source of OPSF is taxation. No
amount of semantical juggleries could dim this fact.

It is settled that a taxpayer may not offset taxes due from the claims that he may have against the
government. 58Taxes cannot be the subject of compensation because the government and taxpayer are not mutually
creditors and debtors of each other and a claim for taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off. 59

We may even further state that technically, in respect to the taxes for the OPSF, the oil companies merely act as
agents for the Government in the latter's collection since the taxes are, in reality, passed unto the end-users –– the
consuming public. In that capacity, the petitioner, as one of such companies, has the primary obligation to account
for and remit the taxes collected to the administrator of the OPSF. This duty stems from the fiduciary relationship
between the two; petitioner certainly cannot be considered merely as a debtor. In respect, therefore, to its collection
for the OPSF vis-a-vis its claims for reimbursement, no compensation is likewise legally feasible. Firstly, the
Government and the petitioner cannot be said to be mutually debtors and creditors of each other. Secondly, there is
no proof that petitioner's claim is already due and liquidated. Under Article 1279 of the Civil Code, in order that
compensation may be proper, it is necessary that:

(1) each one of the obligors be bound principally, and that he be at the same time a principal creditor
of the other;

(2) both debts consist in a sum of :money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
 (3) the two (2) debts be due;

(4) they be liquidated and demandable;

(5) over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.

That compensation had been the practice in the past can set no valid precedent. Such a practice has no legal basis.
Lastly, R.A. No. 6952 does not authorize oil companies to offset their claims against their OPSF contributions.
Instead, it prohibits the government from paying any amount from the Petroleum Price Standby Fund to oil
companies which have outstanding obligations with the government, without said obligation being offset first subject
to the rules on compensation in the Civil Code.

WHEREFORE, in view of the foregoing, judgment is hereby rendered AFFIRMING the challenged decision of the
Commission on Audit, except that portion thereof disallowing petitioner's claim for reimbursement of underrecovery
arising from sales to the National Power Corporation, which is hereby allowed.

With costs against petitioner.

SO ORDERED.

Caltex Philippines, Inc. v Commission on Audit GR No. 92585, May 8, 1992

FACTS:
In 1989, COA sent a letter to Caltex, directing it to remit its collection to the Oil Price Stabilization Fund (OPSF),
excluding that unremitted for the years 1986 and 1988, of the additional tax on petroleum products authorized under the
PD 1956. Pending such remittance, all of its claims for reimbursement from the OPSF shall be held in abeyance. The
grant total of its unremitted collections of the above tax is P1,287,668,820.
Caltex submitted a proposal to COA for the payment and the recovery of claims. COA approved the proposal but
prohibited Caltex from further offsetting remittances and reimbursements for the current and ensuing years. Caltex moved
for reconsideration but was denied. Hence, the present petition.

ISSUE:
Whether the amounts due from Caltex to the OPSF may be offsetted against Caltex’s outstanding claims from said funds

RULING:
No. Taxation is no longer envisioned as a measure merely to raise revenue to support the existence of government. Taxes
may be levied with a regulatory purpose to provide means for the rehabilitation and stabilization of a threatened industry
which is affected with public interest as to be within the police power of the State.
PD 1956, as amended by EO 137, explicitly provides that the source of OPSF is taxation. A taxpayer may not offset taxes
due from the claims he may have against the government. Taxes cannot be subject of compensation because the
government and taxpayer are not mutually creditors and debtors of each other and a claim for taxes is not such a debt,
demand,, contract or judgment as is allowed to be set-off.
Hence, COA decision is affirmed except that Caltex’s claim for reimbursement of underrecovery arising from sales to the
National Power Corporation is allowed.